ValueClick is an internet asset play trading below cash and equivalents, with no debt and with an expectation of positive operating earnings by the end of the next fiscal first quarter. Join the crowd, right? There's more, but please do read the disclaimer at the bottom of this entry.
Most intriguing is a 53% ownership stake in ValueClick Japan valued at about $135M. This is largely in addition to $117M in cash and about $10M in Doubleclick (DCLK) shares, but you won't find it glaring at you on the balance sheet, since the operations are reported together. There is about $25M on the Japan side that you don't want to double count. Nevertheless, add these things up and with a $124M market cap, we're being paid a pretty penny to take the US and non-Asian business. ValueClick took in a little over $1M in cash last quarter by selling just 17 shares of ValueClick Japan, so the stake is very real - and there are over 8000 more shares where those came from. In recent years, these situations have been limited mainly to apparel retailers loaded with inventory, so net current assets was next to meaningless. Here, though, the assets are quite real, and there is no inventory to verify.
There are reasons to believe the natural price level for the business - and the shares - should be higher. Therefore I see a margin of safety in the current price even without playing the obvious arbitrage.
The business is in transition but still growing. What is the business? An internet advertising network whereby advertisers pay ValueClick, and ValueClick in turn pays the publisher, only when a web surfer clicks on the advertiser’s banner. They are pruning their customers, taking it from 82% dot coms to 72% dot coms, while maintaining their absolute numbers. Overseas contribution will be 50% by the end of next year, and revs should hit $63M. Advantageous is that ValueClick has been able to maintain its pricing and streamline operations on the cost side, resulting in gross margin growth even as the general market for internet advertising gets hit - thanks to the performance-based model, which is more attractive in times of uncertain effectiveness of internet advertising.
VCLK is acquiring competitor ClickAgents with stock. This seems like the bonehead move of the century. The stated reason is that the deal was negotiated with the stock up at $10+, and they would have had to pay more in cash. Still, sheesh, I say buy with cash, and I admit I do not buy the CFO's reasoning. Advertising.com is a private competitor with similar revenues, but with worse profitability measures relative to ValueClick, or so I understand.
Doubleclick owns 28% of ValueClick, with rights to buy up to 45% at nearly $22/share. There is a significant lock-up on these shares that takes us well past 2001.
Founding investors and insiders had margined themselves somewhat heavily on this stock, and had to sell as it fell below five. The general lock-up on shares ended in September, precipitating a fall as well. Together, these things caused a pretty serious spike down to the 3 5/8 range, from which the stock has yet to really recover. Hence, I believe it is in a rather artifactual trading range caused by massive margin calls and abandonment by the growth and momentum fiends. Clearly it will take some time for the value guys to embrace an internet play, but the ValueClick Japan factor should make it relatively easy once open minds prevail.
Already management is starting to hear less inquiries from investors about click-through rates (they're stable) and more inquiries regarding quality of accounts receivable (relatively small and high-quality, or so I'm told). I don't expect the value guys to take too long to catch on. I'll try to answer a few questions if they come up, but I must admit I won't support this idea as much as I did Huttig - my time pressures are greater now than then [ not to say that they are greater than yours ;)]
DISCLAIMER: I benefit from this stock's appreciation, and have acquired it at a price significantly below the current one. I do not have a specific exit price in mind at this point, and make no promises that I will notify people here when I sell. I therefore prescribe two grains of salt and a ton of due diligence. You never know my motives, although I will say that I am just trying to put a second idea up in accord with the requirements of VIC, and in good faith.
I feel value makes a great catalyst, but in this case you have artifactual trading pressures due to margin calls, tax-loss selling, and insider lock-up expiration. All of these pressures, once released, may provide catalysts for near-term price appreciation as we move into 2001. Doubleclick owns a bunch of the stock, and it would not be terribly surprising to see a takeout, although I have not investigated this aspect very thoroughly yet. The industry is consolidating, and we're talking at the most expensive a free business here. Positive net income next year will likely put the operations on the valuation map, which could take the shares to $10 with only the slightest change in perception.
|Entry||11/07/2000 09:07 AM|
|Mike - for the Japanese asset, are they restricted as to the quantity of shares that they can sell in any given period (like a US Rule144). Do they intend to sell significant quantities of stock any time soon in Valueclick Japan. Thanks for the disclaimer about owning shares, but I have always assumed that members are only recommending stocks that they own, after all, I don't know why someone would recommend a stock that isn't good enough to invest in themselves!|
|Entry||11/07/2000 11:03 AM|
|Per the CFO, no significant restrictions, but if they sell below 50%, obviously the asset would then show up differently on the balance sheet and operations would be removed from the P&L. This wouldn't necessarily be a bad thing from my standpoint, as it would increase visibility of the asset, but my feel and opinion is that the 50% level is not something they want to violate. The few shares they sold last quarter "came to them." Per their recollection on the call, they weren't actively looking to sell the shares. I did not clarify what they meant by this. Globally, given my relatively simple investment thesis here (a dollar selling for much less than a dollar despite a viable and even growing business), such clarification wasn't terribly important to me. - Mike|
|Entry||11/12/2000 08:53 PM|
|Mike, it looks like another very cheap play but...
(1) The Japan operation adds real value to VCLK because of its stock ownership but what's the business really worth? Selling 17 high-priced shares is far different than trying to unload 8000. Is the Japanese operation producing positive cash flow and, if not, what is the cash burn rate?
(2) Is there anything proprietary about Value Clicks' business? Can other advertisers join the fray at reduced prices? What are VCLK's advantages?
(3) What's the pro formas with the ClickAgent acquisition? Does that slow the timetable to profitability?
(4) I can certainly see a floor here because of the cash (unless a lot of dumb acquisitions are in the offing)...but I'm less clear on the upside. What will it take for 'performance-based advertising' to be profitable? It's my understanding that they are the biggest player in the field and make money from every click-through. What are they projecting for future growth rates and margins?
(5) How do they price their product? What kind of numbers do they require for break-even?
(6) I'm lost as to why they want to keep their ownership of ValueClick Japan at 53%. If they lowered their ownership stake they would raise millions but, more importantly, by 'marking to market', they'd shine some light on a very valuable asset. It would probably result in a higher stock price...thereby making their future planned acquisitions cheaper.
(7) Can you explain the term 'artifactual'...you used it a couple of times and I'm not familiar with it.|
|Entry||11/17/2000 09:35 PM|
|Thanks for the Q's. Good job on Dutchfork. The book value shot up just like you said. I've had a hard time contacting them though - they route me to Trident. I also notice that Trident is often the broker sitting on the bid. Evidently there is the possibility Dutchfork may be able to be bought in just a year's time. Care to elaborate on whatever OTC ruling came down? I'll check the Dutchfork thread for a response. Thanks.
As for VCLK, some of this stuff in your Q's you can easily discover with a little digging. I'll try to provide some additional insight based on your Q's. The conference call provides a lot of good insight into the industry. Evidently they are having success executing their plans, and they have been able to retain pricing power and increase margins while accounts receivable have declined, which argues favorably for its model in tough times for dotcoms. Most of their churn of clients is coming from self-pruning and addition as they seek a lower percentage of dot coms. They are predicting $63M in revenue next year, up ~50%, with operational profitability by the first quarter and maintaining or improving operating margins. They seem focused on controlling costs, and are located in an area where labor isn't an issue; employee turnover is low.
It has been said that great size is not requisite in this industry for growth, but rather that having a defensible niche and relatively unique product will drive organic growth just fine. ValueClick is establishing such a niche, having just acquired one of its two prime competitors in ClickAgents.
The Japan operation. On the call, the CEO said something like, "If there were an acquisition, that might bring to the forefront the value in Japan; that value that we're seeing there is very real. There's $10/share or more of net assets including ValueClick Japan. This would be the definition of arbitrage." That's what I wrote in my notes, thought it may not be an exact quote and most of it was in response to questions. There is no restriction on their ability to sell shares, but it is a very illiquid, expensive stock that only trades a few shares a day. The 17 they sold this last quarter weren't shares that they were trying to sell; evidently someone asked to buy directly from ValueClick. Why ValueClick is so willing to do so is somewhat vexing, though.
The international business is becoming a very significant business for them, arguably because of better brand equity overseas than here in the US, but also because they are in earlier in more nascent markets overseas. The company claims that VCLK Japan is the largest ad network in Japan. And Japan is where they introduced a performance-based wireless product first, with Europe to follow. The overseas operation is also growing faster than VCLK US. Hence, the generous valuation overseas. Japan revs were 24% of total in 2Q, 37% in the last Q, and will be 50% next year. That's why they don't want to fall below 50% ownership.
They own 8438 shares of VCLK Japan, which trade for about $16,000 each. They've been falling along with VCLK US, but seem to be hitting a base much like VCLK US. VCLK Japan only trades a few shares/day. VCLK could dribble nearly $8M worth without falling below 50%. They already had $4 1/2 bucks in cash as of the last CC, so I don't see them needing to dribble shares. But there's my reasoning, too. I bought under 4.
The CFO readily admits the lockup expiration and dotcom meltdown had a synergistic effect in terms of driving the stock down. Evidently when the stock fell under 5, founding employees who had margined themselves to buy the stock had to sell - as did anyone who had margined themselves - and hence the stock fell below 4 - an unsustainable valuation IMO.
ClickAgents has some $14M or so in revenue and is also cash flow positive - the press release says 4M in additional operating profit for VCLK. The CFO thinks he got a steal, and I never got a satisfactory explanation why they didn't just buy with cash. It also fills a need for the company. The other major competitor, Advertising.com, has negative cash flow. I expect that they will not buy Advertising.com, and that that other acquisitions would be small and on an opportunistic basis to fill potential needs. As we've seen, financially strong internet companies sometimes don't need to buy out weaker competitors - they can rather just let them whither. Advertising.com is approximately the same size as ValueClick in terms of revenues.
By artifactual (which I admit probably isn't a word), I just meant that things aren't as they first appear on the surface. I notice on Yahoo! much was made of the insider selling, which was necessary and contrary to the intent of the insiders.
By the time I posted it here, it was 4 3/8. Once the business shows decent results on the bottom line and we get into next year with a let-up in the selling pressure, I can't imagine that it would remain this cheap - and it may even end up getting acquired itself. Doubleclick owns a lot, with the right to buy more at a much higher price. That's the natural suitor, and ValueClick is already implementing DoubleClick's technology. I'd be surprised if this stock were to languish and it was not eventually acquired.
|Entry||11/21/2000 08:09 PM|
|(so much for not posting...)
Don't the terms for the purchase of onResponse.com trouble you too along with the ClickAgents deal? Cash and a bunch of shares. Maybe I can understand why onResponse would want the shares if VCLK achieves the level you think it might, but where is the benefit from VCLK's side? Or is the CFO simply a fool?|
|Entry||05/31/2001 06:30 PM|
|Appears like you came to the conclusion he was a fool...|